Earnings Beat Shows PepsiCo's Emerging Markets Formula Is A Winner

Oct.16.11 | About: PepsiCo Inc. (PEP)

By Jason Jenkins

PepsiCo Inc.’s (NYSE: PEP) third-quarter profit rose 4% due to higher prices and rising sales of its snacks and beverages – especially overseas. Wall Street seemingly approves of the third quarter EPS and revenue numbers, which came in above analyst predictions. Here are the highlights that made everyone so giddy:

  • The company reported Wednesday that it earned $2 billion, or $1.25 per share, for the period ended September 3. That’s up from $1.92 billion, or $1.19 per share, a year ago.
  • Earnings were $1.31 per share. Analysts surveyed by FactSet expected $1.30 per share.
  • PepsiCo’s stock added $0.55 to $61.50 in premarket trading.
  • Revenue climbed 13% to $17.58 billion. That topped analyst expectations for $17.11 billion in revenue.
  • For the past five quarters, net income has increased 1.7% on average year over year.
  • PepsiCo has averaged revenue growth of 26.2% over the past five quarters.

The Current Climate for Multinationals

PepsiCo, like many multinational stocks, was recently trying to find the right mix during this period of global economic uncertainty. It found its recipe for success in this international economic environment by raising prices and promoting growth in emerging markets.

Many other multinational consumer brands – including McDonald’s (NYSE: MCD) and Nike, Inc. (NYSE: NKE) – increased prices in an attempt to offset their rising costs for ingredients, packaging and transportation. Also, to a larger degree, multinationals are reliant on emerging markets to bolster performance. Domestic consumption was stagnant due to the current U.S. economy coupled with a 9.1% unemployment rate.

Global Markets Crucial to 3Q Numbers

PepsiCo European markets reported a 37% revenue increase due to higher prices and the addition of Russian juice and dairy company Wimm-Bill-Dann. The combination of revenue for Asia, the Middle East and Africa rose 25% on increased prices and volume growth stemming particularly from emerging markets.

The Latin America Foods division, led by Brazil and Mexico, posted a 19% increase in revenue. Overall, global snacks volume increased by 8% and worldwide beverage volume climbed 4%. As stated in its release, PepsiCo’s volume gains were driven by growth in emerging markets. For the full year, PepsiCo maintained its forecast for high single-digit earnings growth.

Investor’s Take

PepsiCo is definitely taking advantage of global demand from emerging economies, racking up annual revenue growth of about 24% in those same markets. And with no clear view of how this market is going to work out, what you should be looking for is a formula to reduce risk – gaining the best possible return for the lowest amount of risk. PepsiCo has raised dividends 39 years in a row and its stock yields 3.4%. The combination of international growth and dividend income could make Pepsi a solid play in this environment.

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